Extensions to the Option Valuation Model

Abstract

While the previous sections dealt with solutions to the basic set-up, we shall from now on be concerned with extensions to the model that are particularly relevant with respect to practical applications. We intend to relate the results we will obtain in the sequel to the ones in the base case, which is why we no longer consider the entire range of cases looked at before but rather focus on the instance of non-perfect correlation between the state-contingent components of the buyer’s utility and the spot price. Additionally, we limit ourselves in part to case A (see Sect. 3.4.4 for the corresponding characterization), because this case captures the most interesting features and, at the same time, allows analytical expressions for the solutions.